Greece Faces Eu Tough Love

Greece Faces Eu Tough Love

You will pay and you will stay. That’s the message the EU is giving Greece as Greek officials warn of a possible Grexit and its government scrapes the “bottom of the barrel,” as Reuters put it, to pay pensions and salaries.

By Vikram RangalaFriday, April 17, 2015 - 00:00

Greece Faces Eu Tough Love

Nevertheless the Stoxx dropped and US stocks are down today as well. It is as likely to be profit-taking amid uncertainty as a genuine commentary on the European economy. The market also had the second-highest consumer confidence level in the past eight years to react to, as well as a jobless claims number that, while higher, marked the sixth straight week that figure has been under 300,000.

That means either the Greece situation is bad enough to overshadow all the good news, or the market is just digesting the gains since the beginning of April. It’s most likely the latter.

REPAYING CREDIT AND REPAIRING TRUST

The other market that has reacted sharply are Greek government bonds. The yields have spiked up, indicating that two things are happening. First, bond prices are plummeting because no one thinks buying Greek debt is a good idea right now. In other words, Greece doesn’t seem like a trustworthy risk.

Second, those brave enough to take on some Greek debt want to be well paid for their risk-taking. Bond yields, to some degree, represent how hard people think it is to trust the borrower. A spike like this reminds us that the word credit comes from the Latin credere, “to trust or believe in.” Right now, people find it a little harder to believe in Greece. But that doesn’t mean they are giving up faith altogether.

European governments are now openly saying the two things that are most likely to bring long-term confidence. First, Greece is not going to leave the euro. And second, Greece both can and will be expected to make good on its debt. Let’s look at both more closely.

When the European Union and the various common market and central banking components of what we now call the EU were created, at no point did the founding countries spell out a plan for leaving. And they don’t seem interested in coming up with an exit plan now. Georg Streiter, Merkel’s deputy spokesman, told Bloomberg: “We’re of the view that Greece will hold to the commitments it made to the institutions.”

What an impeccably German way of saying, “You will pay us back.” Contrast that with Greek finance minister Yanis Varoufakis’s description of Greek’s status in the EU: he quoted a line from the 1976 Eagles song “Hotel California”: “You can check out any time you like, but you can never leave.”

The classic rock reference no doubt added to the scarf and jeans-wearing Varoufakis’s reputation as Europe’s hippest (albeit brokest) finance minister, but it may be a sign of hope. We may yet see a rough but real reconciliation between him and his 18 counterparts at their April 24 meeting in Riga, Latvia.

With his Syriza party enjoying a 48% approval rating in the most recent poll, twice that of the rival New Democracy party, Varoufakis and prime minister Alexis Tsipras may feel more confident accepting the reforms which not only Germany but now US Treasury Secretary Jack Lew are insisting on.

GREECE WILL STAY, BUT WON’T STAY THE SAME.

If the EU countries were individual people, then the Riga meeting would look a lot like an intervention: “We love you, but you have to change your ways.” Europe wants some fundamental reforms: broaden the tax base and collect from tax dodgers, reform the pension system that is so obviously breaking Greece’s cash reserves, and deregulate markets to spur competition. We should keep in mind this is European-style deregulation. It won’t turn Greece into Texas.

There may be a larger vision behind this stay-and-pay resolution they seem headed for. The financial crisis left the poorer European countries with massive youth unemployment and difficulty paying for education. Europe doesn’t need more disgruntled and unemployed young people, especially if some of them decide to seek their fortunes outside a non-euro Greece. Italy already faces a refugee crisis from across the Mediterranean. And EU member Turkey now has over a million Syrian refugees who will not be returning home anytime soon.

Both Europe and its once and future member Greece recognize that however much of a problem Greece might be for a while, it’s wisest to keep the problem in-house and work the problem together. If they succeed—and they may well succeed—they will establish a precedent for how united Europe deals with crisis that could last decades or even centuries.

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